Opinion 91-55

This
opinion represents the views of the Office of the State
Comptroller at the time it was rendered. The opinion may no
longer represent those views if, among other things, there have
been subsequent court cases or statutory amendments that bear on
the issues discussed in the opinion.

BONDS AND NOTES -- Debt Limits (exclusion from - calculation of
net revenues for exclusion for self-liquidating indebtedness)
WORDS AND PHRASES -- "Cost of Operation, Maintenance and
Repairs" (depreciation not included as) -- "Net Revenues"
(depreciation not deducted from gross revenues to calculate)

GENERAL MUNICIPAL LAW, §6-k; LOCAL FINANCE LAW, §123.00; STATE
CONSTITUTION, ART VIII, 5(C): Depreciation is not a "cost of
operation, maintenance and repairs" to be deducted from "gross
revenues" to calculate "net revenues" for purposes of the
exclusion from debt limitation for self-liquidating
indebtedness pursuant to Local Finance Law, §123.00.

You ask whether depreciation is included within the phrase
"costs of operation, maintenance and repairs" for the purpose
of calculating the exclusion from debt limitation pursuant to
Local Finance Law, §123.00. Apparently, municipalities which
account for revenues on a cash basis have not been including
depreciation as a cost of operation. In contrast, those
municipalities which account on an accrual basis have been
including depreciation as a cost of operation.

Article VIII, §4 of the State Constitution limits the
amount of indebtedness which may be incurred by counties,
cities, towns, villages and certain school districts to
specified percentages of the average full valuation of taxable
real estate therein. The purpose of constitutional debt limits
is to prevent the imposition of heavy tax burdens on future
generations (Report by the New York State Constitutional
Convention Committee 1938, Vol. X, "Problems Relating to
Taxation and Finance", p 381; Bank for Savings v Mayor, 102 NY
313, 318).

Article VIII, §5(C) of the Constitution authorizes an
annual exclusion from the debt limitation of a county, city,
town or village for indebtedness contracted by the county,
city, town or village for a public improvement or service owned
or rendered by the municipality. The amount of this exclusion
is proportionate to the extent that the improvement or service
yields "net revenue" in a sum equal to 25% or more of the
amount required for debt service on the indebtedness. Section
5(C) also requires that "net revenue" must generally be
determined "by deducting from gross revenues of the preceding
year all costs of operation, maintenance and repairs for such
year ..." The exclusion may be granted only if the revenues
are applied to and actually used for payment of all costs of
operation, maintenance and repairs, and payment of the amount
required for annual debt service. The rationale for this
exclusion, as explained in the Report of the Constitutional
Convention Committee of 1938, is that the "debt ... incurred by a municipality for a revenue-producing
improvement, to the extent that such debt is self-liquidating,
... neither adds to the burden on the taxpayer nor impairs the
municipality's credit" (Report, op cit, pp 384-385).

In accordance with article VIII, §5(C), the State
Legislature, in Local Finance Law, §123.00, has prescribed the
method by which and the terms and conditions under which the
proportionate amount of any indebtedness to be excluded shall
be determined. Under section 123.00, an application may be
filed with the State Comptroller for the purpose of obtaining
an exclusion of the indebtedness (Local Finance Law,
§123.00[g]). The Comptroller is then required to make a
determination as to the extent to which any such indebtedness
may be excluded (Local Finance Law, §123.00[j]).

Determinations of whether, and the extent to which,
indebtedness for a revenue-producing improvement is excludable
from the municipality's debt limitation require a determination
of the amount of revenues available for the payment of debt
service on the indebtedness (Local Finance Law, §123.00[e]).
Local Finance Law, §123.00(e) provides that the maximum amount
of the indebtedness that may be excluded:

shall be in the same proportion to the total
amount of any such indebtedness as the amount
of any such net revenue shall bear to the
amount required in any such year for the
payment of interest on and amortization of, or
payment of, any such indebtedness (emphasis
added).

"Net revenue" is determined for this purpose by deducting from
gross revenues of a year all "costs of operation, maintenance
and repair for such year" (Local Finance Law, §123.00[d];
emphasis added). Taxes, assessments and subsidies by the
municipality are expressly excluded from the computation of
gross revenues (id.).

Although the phrase "costs of operation, maintenance and
repairs" is not defined, it is a general rule that "[t]he
primary consideration ... in the construction of statutes is to
ascertain and give effect to the intention of the Legislature"
(McKinney's Statutes, §92[a], p 176). The first source of that
intention is found in a literal reading of the entire statute
itself (id., §92[b], p 182). In this regard, we note that the
language of Local Finance Law, §123.00(f), describing the
disposition of revenues after an exclusion has been granted,
suggests that the "costs" referred to in section 123.00(d)
include only items involving actual expenditures:

Where an exclusion has been granted pursuant
to this section, the revenues of such public
improvement ... for the period for which the
exclusion is granted, shall be applied to and
actually used for payment of all costs of
operation, maintenance and repairs for such
period, and payment of the amounts required in such period for interest on and amortization
of or redemption of the indebtedness excluded,
or such revenues shall be deposited in a
special fund to be used solely for such
payments. (emphasis added; see also NY Const,
art VIII, §5[C]).

Moreover, such a construction of section 123.00(d) is
consistent with the rationale for the exclusion because only
costs involving actual expenditures affect a municipality's
ability to pay debt service from the revenues of the
improvement.

It has been held that "[d]epreciation expense does not
represent an actual expenditure of money ... but is a deduction
against income to allow for the exhaustion and wear and tear of
certain assets" (Kroger Co. v Dep't of Revenue, 614 SW 2d 705,
709). Similarly, it has been held that "[d]epreciation is a
mere book figure which does not either reduce the actual dollar
income ... or involve an actual cash expenditure when taken"
(Stoner v Stoner, 307 A 2d 146, 152). Therefore, since section
123.00 anticipates that only costs involving actual
expenditures be deducted from gross revenues, and since
depreciation does not involve an actual expenditure, we
conclude that the phrase "costs of operation, maintenance and
repairs" in article VIII, §5(C) and Local Finance Law,
§123.00(d) does not encompass an allocation for depreciation.

We find further support for our conclusion in the
legislative history of a companion statutory provision, General
Municipal Law, §6-k. Section 6-k provides that:

The governing board of any municipal
corporation operating an electric public
utility service shall establish solely by
appropriations from the revenues of such
service, a depreciation reserve fund, the
assets of which shall be used solely for, and
for no other purpose than, the improvement,
extension, or replacement of such service, or
the payment of indebtedness incurred in
relation to the construction, improvement,
extension or replacement of such service,
except as otherwise provided in section 123.00
of the Local Finance Law ... (emphasis added)

Under section 6-k, the municipal governing board must require
that, out of the revenues of the service, there is deposited
periodically in the reserve fund the amounts entered in the
depreciation reserve account of the electric utility service as
the depreciation accruals for that period. A depreciation
reserve account is described in section 6-k as an account in
which the original cost of the service is being distributed to
expenses in substantially equal annual, quarterly or monthly
amounts during the expected service life of the component parts
of the service, by direction of the public service commission
(see 16 NYCRR 197, Balance Sheet Account No. 261).

Section 6-k was added by chapter 457 of the Laws of 1952.
In this Office's memorandum to the Governor concerning the bill
which became chapter 457, we noted that the "except" clause
resolved a conflict between section 6-k, and Local Finance Law,
§123.00 and article VIII, §5(C) of the Constitution:

The conflict occurs because the words "costs
of operation, maintenance and repairs", as
used in such statutory and constitutional
provisions, do not require contributions to
depreciation reserve accounts. It follows
that the revenues of a municipal electric
utility to which such provisions are
applicable must be used for operation,
maintenance and repairs, and debt service,
before the revenues may be used for
contributions to a depreciation reserve fund
... (emphasis added).

The clear implication of the foregoing is that the term
"operation, maintenance and repairs" as used in Local Finance
Law, §123.00 and article VIII, §5(C) does not include
depreciation. Therefore, contributions may not be made to a
reserve fund established pursuant to General Municipal Law, §6-k until after the revenues have been applied for the purposes
prescribed by these constitutional and statutory provisions.

Accordingly, it is our opinion that the phrase "costs of
operation, maintenance and repairs" as used in Local Finance
Law, §123.00 for purposes of calculating the exclusion from
debt limitations for self-liquidating indebtedness does not
include depreciation as a "cost" to be deducted from "gross
revenues" to calculate "net revenues".